ESG’s transatlantic fault lines. Regulators come for ratings. Greenwash is legal gold rush. Plus, petrochemical companies fight dirty.
On the heels of a successful webinar, we are thrilled to share more about how PGIM Quantitative Solutions is using Util and other alternative data providers to enhance their sustainable investing capabilities in our latest Case Study.
In the world
🇺🇸 The transatlantic ESG gulf continues to grow. Notwithstanding the apocalyptic scenes coming out of New York, ‘climate change’ remains a controversial term in the US. Unfortunately for its detractors, it may soon be a due-diligence requirement for any business doing business internationally. The European Commission is expected to release the final set of European Sustainability Reporting Standards this month, which will come into effect next year and — like it or not — apply to any multinational doing business in Europe. In response, Republican lawmakers are now seeking to block the sweeping EU reporting measures on top of their ongoing attempts to ban sustainable investing on home turf.
🇪🇺 ESG ratings firms face regulatory scrutiny. Next week, the European Commission will announce new rules for ESG rating agencies as part of a crackdown on greenwashing. Its draft proposal warns of "divergences, lack of transparency,” and conflicts of interest, and includes measures that would ban agencies from offering consulting or insurance services to businesses they rate. On the subject of ESG ratings, our CEO Patrick Wood Uribe recently shared his thoughts in his first op-ed as a member of the Forbes Finance Council. His arguments are likely to chime with UK wealth managers, who are reportedly calling for more sophisticated data to meet the demands of increasingly discerning high net worth clients.
🗺️ One man’s greenwash is another’s gold rush. The regulators have been cracking down on fossil fuel companies for some time: Most recently, the UK advertising watchdog banned ‘green’ advertising by oil & gas companies. Now, attention is turning to their lenders. The European Banking Authority (EBA) sounded the alarm on greenwashing in the financial sector, where firms are burnishing their green credentials while continuing to finance ‘dirty’ projects. The EBA cautions that the uptick in greenwashing poses a serious reputation and litigation risk, which is bad for the fossil-fuel complex but great news for lawyers: The FT reports that the recent spike in lawsuits heralds a “golden moment for climate litigation.”
In the headlines: Cold, shiny, hard plastic (and truths)
Last week, around 180 nation-state representatives converged on the UNESCO headquarters in Paris for the Second Session of the Intergovernmental Negotiating Committee (INC) on Plastic Pollution. Touted as “the most important treaty negotiation of our age” (or, at least, since the Paris Agreement), the INC has one purpose: Establish a regulatory framework to eliminate plastic pollution and implement a circular plastic economy. By Friday evening, a week of tense talks came to a close with the first draft of an international agreement in place.
Notwithstanding promising progress, delegates have a long way to go. The UN has planned a further three sessions in which to hammer out a “legally binding instrument” before 2025. As of now, international divisions centre on the “legally binding” portion of the agreement and the question of whether petrochemical companies will be allowed to continue producing new plastics and polymers. Both are a source of contention for oil-producing countries and companies, the latter of which are increasingly dependent on plastic demand as the market shrivels for fossil-fuel energy.
No wonder industrial lobbyists were out in full force in Paris.
A case study in hidden impacts
Traditionally, plastic was approached as a ‘waste-only’ problem (i.e. SDGs 12 (Responsible Consumption & Production), and 11 (Sustainable Cities & Communities)). The INC is responding to growing awareness that plastics — like fossil fuels — have detrimental outcomes for a suite of sustainability issues, including SDGs 3 (Good Health & Wellbeing), 6 (Clean Water & Sanitation), 13 (Climate Action), 14 (Life Below Water) and 15 (Life on Land).
Negative impacts are the inevitable consequence of pollution at two points in the plastic value chain:
Plastic waste: Our data show that the world produces nearly 400 million tons of plastic every year, of which 40% is single-use. Just 9% of ‘recyclable’ plastic is recycled, as there’s no cheap or realistic way to repurpose plastic at scale. The “recycling myth,” reports Reuters, is an invention of the oil industry reorganised under the lobbying banner The American Chemistry Council, which counts among its members subsidiaries of ExxonMobil, Shell, and BP. Per OECD projections, plastic consumption is set to triple by 2060; without commensurate growth in recycling, the effects on biodiversity will be devastating.
Greenhouse gas (GHG) emissions: Today, plastic production accounts for 4.5% of GHG emissions, the majority of which is a byproduct of the conversion process from fossil fuels. The International Energy Agency predicts plastic manufacturing will account for more than a third of the growth in oil demand by 2030 and nearly half by 2050, ahead of trucks, aviation, and shipping. At that point, the cumulative GHG emissions from plastic could reach over 56 gigatons, or 10-13% of the entire remaining carbon budget — and that’s before taking into consideration the direct and indirect GHG emissions created by marine microplastic waste.
On neither front does the industry have much incentive to take action, both because negative-impact activities dovetail with profit and because their real-world consequences are hidden across the value chain. As a result, petrochemicals are often excluded from the net-zero targets and sustainability disclosures of fossil-fuel companies, making their effects something of a black hole for sustainable data and investors.
The INC was born of the recognition that comprehensive, harmonised, and binding regulation is the only way to combat an international plastic-pollution crisis. Given the misalignment between planetary and plastic-industry interests, it is entirely unrealistic to expect companies to address the full value-chain scope of negative impacts voluntarily. Address — or disclose.
Util reveals the holistic product impact of petrochemical companies such as Shell (below). Per Client Earth: “Shell’s targets are limited to its own ‘Net Carbon Footprint’ metric. Despite the massive climate impacts of petrochemicals used for plastics, Shell’s Scope 3 net-zero target is limited to energy products – and entirely excludes its petrochemicals business, which supplies 17 million tonnes of chemicals per year. The company also opts not to count some of its large fossil fuel trading operations.”